Meanwhile, former Prime Minister Shimon Peres startled many Israelis by endorsing Palestinian statehood. JERUSALEM – Prime Minister Benjamin Netanyahu promised to ease controls on Israel’s economy yesterday – as his former mentor came out of retirement to challenge him for reelection.

After years of tightening government restrictions, Netanyahu said, “We’re opening the belt a little.”

The main opposition Labor Party accused the prime minister of “election economics” to save his job.

Netanyahu’s pledge came as Moshe Arens, a former defense minister and Israeli ambassador to the United States, said he would run against him in a Jan. 25 primary of their Likud Party.

Arens, who retired from politics six years ago, said he was running “because I believe that only I can bring victory and unity” to Likud.

But Arens, who gave Netanyahu his political start in 1982 by appointing him to the No. 2 spot at the Israeli Embassy in Washington, is considered an underdog to replace Netanyahu.

The prime minister’s supporters noted that Netanyahu had pulled into a tie at 45 percent with Labor leader Ehud Barak in the latest poll. Meanwhile, former Prime Minister Shimon Peres startled many Israelis by endorsing Palestinian statehood.

“It’s in our common interest to see a Palestinian state in place as a result of negotiations – a state that lives democratically and flourishes economically,” Peres told the Palestinian Council in the West Bank town of Ramallah.

Yasser Arafat smiled when Peres, the first Israeli official to address the council, praised him for his “long struggle” as PLO leader.

Peres made no reference to the controversy over Arafat’s vow to declare sovereignty on May 4.

Aides have urged Arafat to delay such action because it could further snarl the peace process and help Netanyahu in the Israeli election later in May.

In his speech yesterday Arafat said he would work for a negotiated peace – but added that important dates “cannot be ignored, bypassed or let slide.”